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It seems since the Spitzer investigations there's been an increase in the frequency of insurance shopping.

For many companies the renewal process too often goes like this: The risk manager may put out parts or the entirety of her insurance program to receive competitive bids for one reason or another.

The insurance buyer puts out a request for proposal asking for bids in three weeks. The proposal, which usually offers either minimal information or an enormous amount of information--it's usually at one extreme or another--is sent out to the entire brokerage community.

Every broker looking to write new business starts canvassing the market and ends up bumping into each other along the way. Brokers A, B, C and D all go to insurer X and insurer Y, but insurer X and insurer Y can provide a quote only to the incumbent or the first broker that approaches it. Brokers and carriers start to lose interest in the competition.

The result? There aren't any truly competitive bids, particularly if there's a tight deadline. The organization usually stays with its current broker, often with the same insurance company, with the same coverage terms and conditions, which may or may not be a bad thing. It can be a good thing obviously if the current program is working well and the company is receiving good service, competitive pricing and full coverage. Maybe their premium has even improved.

But it isn't a good thing if there's a major flaw with the current program, whether it concerns service, price or protection. It's a shame that a chance to improve a subpar program was blown.

Meanwhile, all the other brokers spin their wheels, and the process wastes their time. The purchaser may take this approach several times, each time having fewer and fewer competitors trying to bid.

STARTING OVER

For sincere purchasers looking for real competitive bids against a program that is not working to their satisfaction, there is a better, more effective way to request a proposal by using a two-step proposal process.

In the first phase, list your parameters for the line of business you're putting out to bid--whether it's general liability, property or environmental. Don't ask for prices. Instead, ask brokers to develop a concept, or insurance plan, that fits your parameters. Set a reasonable deadline--the more complex your business, the longer notice. At this point, the more brokers, the merrier.

Next, review all conceptual proposals. Let's say 15 brokers respond. Which concepts are the best ones? Will the broker have the strength and experience to follow through with its concept? Can it make its concept become a reality? You might want to ask what the broker has done like this before and what its current roster of clients are like.

After you've completed this analysis, you can narrow the list and select, for instance, no more than five brokers to go out and get competitive bids. Ask them which companies they plan to approach--that is, which markets they believe can best fulfill their concept.

If there are overlapping requests for insurers, assign brokers to different companies to avoid having more than one broker approach the same company. If you know a certain broker has a stronger relationship with a certain carrier, consider assigning the broker to that insurer. If you don't have a good way to judge which broker should work with which company, make assignments alphabetically or at random.

Now it's up to the broker to sell its concept to the allocated markets. Ultimately, each broker will come back with a unique, customized bid from each insurer. At the end of the process--and give everyone realistic deadlines--you might end up with, say, 25 proposals (five brokers each get quotes from five different insurers). You'll still have to do a fair amount of work to select the winner, but you'll be doing worthwhile work because you'll be reviewing truly competitive, well-thought-out proposals.

To make an informed decision during all this work--and keep your sanity--set up a decision tree or table. Across the top of the grid, list the insurers. Down the side, list the coverages or issues of importance, such as building, contents and deductibles. Fill in the table with the corresponding limits, deductibles, time frames, coverage offerings and premiums.

The company offering the broadest coverage for the most reasonable price usually wins. But when selecting the company, price shouldn't be the only criterion. How does the insurer rank for customer service, claims service and loss-control capability? What's the company's financial strength? Look for a Best rating of A- or higher. If it's a large risk, the insurer should be in a financial ratings class of VII or higher, on a scale with XV being the best.

Because all of the proposals will meet the parameters you set out at the beginning, you'll be able to make apples-to-apples comparisons. Sure, coverage details will vary among companies, but you'll have a solid basis for comparison and will be able to judge proposals by looking at those that give you the most features you want at the price you want.

The carrier, of course, is only half the equation. With a broker, trust is foremost. You'll be working with the broker closely, so you have to have trust to establish a comfort level that lets both parties work in tandem to get the best results. Look for an experienced broker that has demonstrated that it will do the right job for you expeditiously. If you need professional loss-control services, look for a broker that can provide them.

The size of the brokerage firm doesn't always matter as much. A small brokerage firm can be terrific, and a big one can be mediocre--and vice versa. Instead of worrying about size, look for service excellence and first-rate knowledge.

Congratulations. We have a winner. You'll have a solid, competitively priced insurance plan. You'll have treated everyone fairly--and most importantly, you'll have saved yourself a lot of time and aggravation.

MARJORIE YOUNG is vice president of E.G. Bowman Co. Inc., a commercial insurance brokerage and loss-control firm in New York City.

February 1, 2007

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